REGULATED short selling, which has been in place since 2007, has come into focus again after technology firm Datasonic Group Bhd decried its unfairness.
Shares in Datasonic plunged on Wednesday, hitting limit down after what is presumed to have been heavy short selling of the stock.
The stock fell as much as 29% or 40 sen that day itself to trade as low as 98 sen per share, which in turn triggered an unusual market activity prompt from the stock exchange.
Bursa had also suspended the trading of Datasonic shares on that day after it fell more than 15%.
In response, Datasonic not only said it wished to be taken out of the approved list for regulated short selling (RSS) but also insisted that the regulator “investigate any short-selling activity or manipulation of the company’s share price”.
This is a rare instance of a listed company wanting to be out of the RSS list but some traders reckon it could spark similar requests from other listed companies not happy with the system.
This is more so in the current bearish market.
So how do companies get into the RSS list, can they request to be out of it and what benefits really does short selling bring to companies?
According to Bursa Malaysia, the key criteria for inclusion of securities into the RSS list include the market capitalisation, the free float of securities and trading volume of securities.
“These criteria help to ensure that approved securities are securities which are more liquid and hence investors would be able to buy back the securities to cover their sell position”, Bursa explains in an email reply to StarBizWeek. Interestingly, the exchange confirmed that Datasonic was not the only company that had requested to be removed from the RSS list.
But the exchange is firm that companies cannot get excluded from the RSS list by requesting so.
“A company can request to be removed from the list. However, under our framework, Bursa may declare any securities as being no longer in the Approved Securities list according to the criteria set, ” the exchange says.
This essentially means that Bursa uses an automatic criteria (based on the criteria of market cap, liquidity and free float) to determine the entry and exit of companies from the RSS list.
What the exchange did say is that it will engage with companies who have issues of being in the list.
“Bursa will engage Datasonic explaining the criteria for inclusion into the approved securities list and its review process, ” Bursa says.
The latest RSS list has 215 securities out of the 920 listed companies on the local bourse.
This list is reviewed every six months.
While it is unsure on how companies get included and excluded from the RSS list every six months, the latest list had removed 31 companies from short-selling activities and added 18 new ones.
Short-selling is essentially the act of investors betting against a company’s stock. Compared to normal trading activities where investors make money when a company’s share price goes up, short-seller makes money if a company’s share price goes down. If the share price goes up, they lose money.
Short-selling activity is another avenue of income for day traders. More importantly, the presence of short selling activity helps increase market liquidity. It is also said to enhance the process of price discovery for stocks. This is why mature markets around the world have it.
However, not everyone agrees on the benefits of short selling. It’s detractors are naturally the owners of companies who are targeted by short sellers.
Short sellers can also get it terribly wrong.
One of the most notable short positions took place in 2012 when hedge fund manager cum shareholder activist Bill Ackman took a US$1bil bet against Herbalife, accusing the company of running an illegal pyramid scheme.
Ackman launched a five-year battle against the company, claiming that the shares of the company were worthless. However, Herbalife shares didn’t go to zero as predicted by Ackmman, but soared to more than US$100 a piece, after the company proved that its businesses were legitimate.
Back to Datasonic, its deputy managing director and major shareholder Chew Ben Ben reckons that there could be an element of manipulation on the recent short selling of his company’s stock.
In a filing this week, Chew prompted the exchange to launch an investigation into the short selling activity of Datasonic’s shares, claiming irregularities.
Speaking with StarBizWeek, Chew explains, “On Wednesday, Datasonic’s share price dropped significantly within that day. I feel that some people are taking advantage of the market weakness and this is unfair for the company and its shareholders”.
The request for the investigation is the first of its kind. In a reply to a question on this, Bursa says that there have been no other companies under the RSS that havemade such a request, except for Datasonic.
On how the exchange will deal with the request, the exchange says, “Bursa will engage Datasonic explaining the criteria for inclusion into the approved securities list and its review process”.
Meanwhile, Chew is still hoping for his company’s shares to be removed from the RSS list, at least until market sentiments improve.
“The company’s fundamentals are still intact and we have more than RM600mil in our order book that will last until the end of next year, ” he says.
On Thursday, Datasonic posted a doubling of its net profit for its third quarter ended Dec 31,2019, to RM20.18mil from RM8.99mil a year earlier. Its revenue for the quarter rose 32% to RM74.97mil from RM56.76mil.
This brings the tech firm’s net profit for the first nine months of FY20 to RM48.05mil, up 93% from RM24.91mil in the corresponding period a year ago.
Another tech company that had faced an onslaught of short selling was UNISEM (M) BHD. Sometime last April, Unisem’s share was suspended from trading after it fell by more than 15% in one day.
That was the same day that Bursa implemented intraday short selling (IDSS), the latest update under the RSS programme.
IDSS was an addition to the RSS programme. Under IDSS, investors are able to short sell within the day, and need to close out their positions on the same day.
RSS involves borrowing shares of a company and selling it with the hope it can be bought back at a later date at a lower value.
At that time, Unisem, which is on the RSS list, had just announced poor first-quarter results.
Notably, RSS was banned in Malaysia in September 1997 but reintroduced in 2007.